Nifty Financial Services stocks: Will sectoral leadership be regained by private sector banks

After a long phase of three years of consolidation and relative underperformance, there were some initial signs of the private sector banks making a comeback attempt. However the RBI decision to curb unsecured lending, made the sentiment turn against them. But only sentiment, in reality will it make a difference for their long term perspective is a matter of debate with answer titling in favour of NO. After today’s monetary policy one more risk is off the table

There are phases in the market when banking and IT stocks tend to move in opposite directions. But this time, it is the banking space which itself is witnessing contra moves . The private banking space is under pressure and PSU banks are doing well. Now this is again a risker trade but for traders, it is time to keep a watch on private banks as they might see a bounce back when FPI’s turn net buyers. Also this would mean that bank nifty which has underperformed may make a strong comeback. Before taking any sell decision in the private banking space, one should remember that the banks in question have created wealth in the long term and even the best of the wealth creators go through a phase of consolidation and what might appear to be a phase of under performance.

For Dalal Street, paints means Asian Paints. However, there is and sooner there will be even more to it.

Nifty IT index is probably among very few sectoral indices which are still below the high they had touched in October 2021. Yes, the sector has some headwinds which not many had thought would appear two years back. But the bigger question is whether this phase of underperformance is about to get over or not. It might be too early to say as short term performance could be many reasons, but the way stocks have reacted to bad news and see sharp upward movement with slightly positive news, it might be worth bringing them back on watch list and shed the bias of looking at all IT stocks with a coloured lens. Stock Reports Plus, powered by Refinitiv, is a comprehensive research report that evaluates five key components of 4,000+ listed stocks - earnings, fundamentals, relative valuation, risk and price momentum to generate standardized scores.

Probably banking is a word which many may not like to hear given the fact that the fall has been led by the banking sector. But the fact is short term market moves are different from what is happening in the real business. In the case of PSU banks, there has been an improvement in performance in the last two quarters. Yes, there will be some cyclical pressure on margins but beside margins there is more to PSU banking space, which is credit off take that too from large private corporates. Given the higher probability of capex cycle is likely to revive, these banks are much better placed due to the size and skill set to lend to such sectors.

Post 2015 and then again in 2018, RBI did a strong rejig in various banking policies, right from capital adequacy to the operational matrix were tightened. The first set of banks which street took note of were larger private sector banks than PSU banks. There is another set of banks, which dont have the distribution reach which large private banks have, but when it comes to ownership they are not the same as the PSU banks. They have very different hybrid kinds of ownership, a sort of quasi private sector banks. These are private sector banks of mid-sized banks which operate in particular regions. Over a period of time they have also been forced to clean up their act. Will they see a strong re-rating?

Among many industries which have seen a strong transformation in the last nine years due to policy initiatives has been the sugar industry. This is despite the fact that sugar is a state subject where central policies can only play a limited role. If one looks at the balance sheet of a large number of them, they are far better placed than they were six years ago and to some extent in the last two years even the institutional investors have started to take exposure in this sector which they have avoided for more than three decades.

Experts suggested that India's banks are likely to be well insulated from the fallout resulting from Credit Suisse crisis, partially due to the country's low exposure to the Swiss lender and partly due to the resilience and inherent strength of the domestic banking sector as a result of the RBI's stern watch.

After witnessing a sharp fall, the nifty bank has witnessed a minor bounce back. A part of that bounce back happened due to short covering in private banking space, another one is due to continued rise of the PSU space. What needs to be watched is whether any negative is able to have a strong impact on private bank space, if not then probably a comeback would soon be on cards. For contrarian and short term traders it is time to put the whole banking space on the watchlist. But again this is trade for high risk traders or investors who have the ability to take a stand against market narrative and take a tactical trade. Check out Stock Reports Plus, powered by Refinitiv, for price targets of over 4,000 listed stocks along with detailed company analysis focusing on five key components - earnings, fundamentals, relative valuation, risk and price momentum to generate standardized scores. SR+ Reports is a complimentary offering to ETPrime members.